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2002 Auto Sales: A Year Of Profitless Prosperity?

Jan 13, 2005

By Agence France-Presse In the annals of U.S. automotive history, 2002 will go down as the year of the incentive, with automakers' generous use of sweeteners expected to push U.S. sales to the fourth-best on record. But even with an estimated 16.8 million light vehicles sold this year, some critics are griping about the cost of this marketing-led sales boom, which they have dubbed "profitless prosperity." "The industry has delivered great value to consumers, but the intense competition among automakers has cut into profitability," notes David Cole, director of the Center for Automotive Research, Ann Arbor, Michigan. Indeed, last quarter's new-vehicle prices were the most affordable in 24 years, according to Comerica Bank. That was thanks in large part to incentives that cost automakers an average of $1,830 per unit through the first 11 months of the year -- up 17.5% on the same period in 2001, according to the auto analysis company, Autodata Corp. But in Cole's view, the phenomenon is unsustainable because the industry simply isn't generating enough profits to invest in new product. "Ultimately the weak are going to fail or downsize," he predicts. "There will be blood on the floor." The most visible sign of the restructuring to date can be seen among the ranks of automotive suppliers, who have gone through a significant shake-up in the past two years, as automakers have sought to drive down their parts' prices. But while Detroit's Big Three are all expected to finish the year in the black, Cole expects a much different Ford Motor Co. to emerge from its current restructuring. "Ford will be a much smaller company than it was five years ago." Subtract a million units of production or so, according to Cole. A recent poll of 100 industry executives by global accounting firm KPMG indicates that insiders don't see any relief coming any time soon. With the U.S. economy in the doldrums, the relentless, if slow, growth in sales of foreign name plates and incentives-led price pressures, a majority of the executives interviewed don't see the industry returning to profitability until 2005. "Right now, North American manufacturers are in a transition phase, and, over the next few years plan to roll out dozens of models with exciting styling and new technology," says Brian Ambrose, national director of KPMG's automotive practice. "They are banking that these new vehicles will recapture the eye of the consumer, returning them to profitability and making 0% financing a thing of the past." For 2003 though, the big challenge will be controlling costs, particularly for the Big Three which face ballooning health-care and pension-related costs, according to KPMG. It's something that General Motors has been intently focused on for the past five years, and its leanness is one of the reasons that the world's leading automotive manufacturer has been able to be so aggressive on incentives, notes Cole. The number of hours that GM workers require to complete a given vehicle has dropped tremendously, he said, giving the automaker enviable flexibility. But other automakers and suppliers still have some way to go to catch up with the efficiency of their Asian competitors, according to the KPMG survey. More than two-thirds of the respondents (70%) said they expected Japanese automakers to leverage greater efficiency into great market share over the coming five years, compared to just over one-half (56%) who see the Americans doing the same thing. "North American manufacturers are still operating under a mass production mentality," says KPMG's Ambrose. "They need to change their manufacturing philosophy to design and deliver vehicles that people want and in smaller numbers." Copyright Agence France-Presse, 2003